UK: FCA "Dear CEO" letter to Asset Managers and alternatives portfolios - what does it say on ESG and sustainability?

The FCA has published a portfolio letter issued to Asset Managers and alternative firms (dated 1 March). 

This letter provides an interim update on the FCA’s supervisory strategy for the asset management and alternatives portfolios (following its August 2022 letter on its Alternatives Supervisory Strategy and its February 2023 letter on its Asset Management Supervisory Strategy.  See our earlier client note here), and

• is intended to reflect changes in the external risk environment and work that has been completed since its February 2023 portfolio letter; and
• sets out the FCA’s areas of focus for this sector over the next year (this is consistent with the multi-year plan set out previously).  The FCA sets out in each case its expectations for firms, and any next steps for the FCA.

This is set against the backdrop of the issues faced by asset managers in the current climate, such as heightened uncertainty and several market shocks in 2023.

What does the letter say?

In the context of ESG/sustainability, a key focus of the FCA is establishing firms' preparedness to handle the considerable amount of current and planned regulatory change impacting this sector alongside the other challenges facing the sector (where many firms are struggling to attract and/or maintain assets under management, leading some firms to implement cost cutting programmes). 

Change management - The FCA will be assessing how firms' governance and resourcing of change programmes has considered and mitigated this risk (particularly firms’ implementation of SDR) to ensure that potential harms to investors and markets are being appropriately addressed.

UK SDRs - On implementation of the UK SDR and Investment labels regime, the FCA directs firms to ensure that boards and other governance bodies are appropriately structured to oversee and review management information about a firms ESG credentials, the third-party ESG information providers used, and the claims made by their firms.  The risk of greenwashing is clearly in mind as the FCA note they “will be concerned if firms make exaggerated or misleading sustainability-related claims, including about their investment products”.

Guiding Principles for ESG - Further the FCA reminds firms that many firms still have further work to do to embed the Guiding Principles for ESG particularly around the disclosure and clarity of information being given to retail investors and consumers.

Next steps

It will be important for firms to consider whether any of the risks of harm identified are present in their firms, and whether any changes need to be made to ensure that these risks are adequately protected against.  CEOs are reminded to engage with their Board and ExCom in this work, the FCA noting that in any future supervisory engagement with a firm, consideration will be given to whether the firm’s governing bodies and Senior Managers have taken appropriate action to ensure that consumers and markets are adequately protected from harms.

Looking for more detail?

For more information on the FCA’s other supervisory priorities for these portfolios, see our more detailed client briefing here: FCA Dear CEO letter to Asset Managers & Alternatives updates supervision strategy for the year ahead